DoL Blasts 9th Circuit for Prudence Presumption Endorsement

November 10, 2010 (PLANSPONSOR.com) – Lawyers representing Labor Secretary Hilda L. Solis have asked the 9th U.S. Circuit Court of Appeals to overturn a three-judge panel's recent decision embracing the “presumption of prudence” standard often seen in employer stock-drop lawsuits.

The Department of Labor (DoL) lawyers made the request in a friend of the court brief in which they ask the appellate court to rehear the case with all judges participating rather than the customary three-judge panel.

The 9th Circuit is considering a rehearing request filed by plaintiff Frederico Quan after the lower court threw out his stock drop suit against Computer Sciences Corp. and a three-judge 9th Circuit panel upheld the lower court.  The judges on the original panel contended that the prudence presumption is in line with the language of the Employee Retirement Income Security Act (ERISA) and of lawmakers who passed it to encourage employee ownership of their companies (see Case Sensitive:”Moench” Mete?).

In their brief, the government lawyers claim instead that the prudence presumption conflicts with ERISA in that the 9th Circuit’s original decision in the case replaces ERISA’s objective prudence standard of court with a “more lenient, judicially-created standard.” Not only that, but the lawyers also asserted that the original 9th Circuit ruling created an improper safe harbor for employee stock investments, which the DoL said could endanger billions of dollars in pension plans.

By adding to the statutory prudent man standard with an “abuse of discretion” benchmark, the three-judge panel’s decision “improperly holds that plan fiduciaries may make or hold plan investments in employer stock even in circumstances where a plan fiduciary would not do so, as long as the ‘company’s viability’ is not implicated,” the DoL lawyers asserted.

The government’s brief in the case is at http://www.dol.gov/sol/media/briefs/quan(A)-11-1-2010.htm

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